Japan's stockmarkets

Small miracles

Japan's retail investors discover the wonders of initial public offerings

MAYBE foreign investors in Japanese equities have not been doing so well after all. Foreigners have been the main drivers of Japan's stockmarket rally since last spring: the Nikkei 225 index has risen by 47% since April 2003. Yet Japan's retail investors have enjoyed far more impressive gains in the country's tiddly stocks. The Jasdaq market for over-the-counter stocks, for example, has risen by 118% since last April. And investments in tiny firms floating their shares for the first time have proved even more lucrative still. A sign of the times: the shares of the latest, a trading company called Recomm, reached over twice their issue price at the end of their first day of trading on May 26th.

Many of the companies making these initial public offerings (IPOs) in a trio of markets—the Jasdaq, the “Mothers” market of the Tokyo Stock Exchange, and the “Hercules” market of the Osaka Stock Exchange—are simply too small for institutional investors. The average IPO in Japan last year raised only ¥5.38 billion ($46m), roughly a quarter the size of a typical American IPO. But Japan's individual investors, who now account for 70% of all Jasdaq transactions and an even bigger share of IPO trading, have been snapping up these tiny firms' new shares. Their hearty appetite allowed 121 Japanese firms to go public last year—50% more than in America. So far this year, another 54 firms have gone public in Japan.

Japan's small investors “have a lot of money”, says Takashi Nishibori, chief editor of TokyoIPO.com, an information service. Mr Nishibori reckons that those individual investors are especially drawn to IPOs, even more than to other over-the-counter stocks, precisely because they go up so much when they are launched—far more, indeed, than in other countries. For this, Japan's small investors can thank in part the country's big securities houses, which were fiercely criticised after the collapse of Japan's IT bubble in 2001, and now seem to be setting offering prices exceptionally low as a result.

From 2000 to 2002, only two-thirds of IPO stocks finished above their initial offering price on the first day. That ratio rose sharply in 2003, and all 54 of the IPOs so far this year have risen on the first day of trading. In most cases, the price quickly doubles or triples. Risa Partners, a property company, went public in March with an offering price of ¥290,000 per share; traded at ¥700,000 on the first day, and reached ¥2.93m per share in mid-April. Since then it has fallen, and closed on May 26th at ¥1.67m a share.

Low offering prices are not the only difference between this IPO boom and the previous one. In 2000, when Japan boasted over 200 IPOs, most of the firms going public were in information technology. Now, a much wider range of small firms are floating. The 16 IPOs since April 1st included two nursing-care providers, a women's clothing wholesaler, a firm organising clinical trials for drugs, another making locks, and the Osaka Stock Exchange itself. The only IT-related firms were a handful of companies selling electronics hardware, a website for golfers, and a firm offering online tips about pachinko games to mobile-phone users.

As well as low issue prices, Japan's retail punters have been exploiting the cheaper trading commissions that are now available online through outfits such as Monex, which will become Japan's biggest online brokerage after a planned merger with Nikko Beans goes through this summer. Kathy Matsui, an equity strategist at Goldman Sachs in Tokyo, says that sales of the Japan Company Handbook—the Bible of Japanese equity investment—have risen 40% in the past year, as new retail investors have piled into the market.

Monex's president, Oki Matsumoto, reckons that excessively cheap IPOs may eventually lead to trouble if small investors take leave of their senses. But buying cheap shares is generally more sensible than buying expensive ones. Ms Matsumoto argues that the IPO boom, and the small-cap rally in general, is helping to spur a much-needed transfer of savings from bank deposits into the equity market—and through commissions, of course, onto Monex's bottom line.